trending Market Intelligence /marketintelligence/en/news-insights/trending/eO7tIFBBnqnGoimTdpySHQ2 content esgSubNav
In This List

Analysts: Clean Power Plan could have driven deeper carbon cuts for power sector


Activity Volumes Across the Equity Capital Markets Dropped Significantly in 2022


Insight Weekly: PE firms shift strategies; bank earnings kick off; bankruptcies plummet

Case Study

A Large Energy Company Manages its Exposure with Robust Tools to Assess Creditworthiness and Set Credit Limits


Insight Weekly: Stocks limp into 2023; GCC banks set for rebound; deep-sea mining faces pushback

Analysts: Clean Power Plan could have driven deeper carbon cuts for power sector

Stakeholders fighting both for and against the Clean Power Plan largely agree that the power industry is on a trajectory to meet the rule's 2030 target for carbon emissions reductions even if the controversial regulation is scrapped. So would its repeal have any impact on carbon emissions in the power sector?

According to analysts from the Rhodium Group, the answer is "yes."

Issued by the U.S. Environmental Protection Agency in August 2015, the Clean Power Plan set a loose emissions reduction target of 32% below 2005 levels by 2030. Each individual state was assigned a particular goal, which ranged in severity depending on the amount of coal generation existing on each state's system. Under the rule, Montana, Wyoming, North Dakota, Wisconsin, Missouri and West Virginia would face the toughest goals, being required to cut carbon emissions between 35% and 44%. Washington, New Hampshire, California, Oregon, Delaware and Maine, meanwhile, would be in the clear, with projected emissions expected to be well below the Clean Power Plan's requirements by 2030.

SNL Image

In light of the news that the rule is slated for repeal, a newly released analysis from Rhodium looked at what the Clean Power Plan would achieve in the unlikely event it stays in place. The analysts based their conclusions on the assumption that the regulation ultimately is repealed.

The group stressed that the 32% goal is a rough estimate not a firm requirement. The rule would require states to dictate their own plans for compliance, and depending on the ultimate effectiveness of those measures, the Clean Power Plan could have achieved much more than a 32% reduction, the report said.

Rhodium estimated that the power sector is on track to reach a 27% to 35% reduction in carbon emissions below 2005 levels by 2030 with a business-as-usual approach. That trajectory is being driven by low natural gas prices, flat electricity demand, rapidly declining wind and solar costs and the extension of tax credits that have driven investment in renewable energy. Many coal-fired power plants also have been retired, leading to a drop in emissions.

Interestingly, the Clean Power Plan is based on 2014 energy market projections from the U.S. Energy Information Administration's Annual Energy Outlook, which estimated that emissions in 2030 would stand at 8% below 2005 levels. So the Clean Power Plan's 32% goal was much more significant when issued in 2015 than it appears now.

Nevertheless, Rhodium predicted that the Clean Power Plan could have had a significant impact on power emissions, especially if states crafted their own plans beyond what the rule suggests. Between 12 and 21 states would have been forced to take some action to reduce carbon, depending on energy market trends, while the remaining states could have continued with existing policies and still met the requirements, according to the analysts.

"If states took full advantage of compliance flexibility the CPP would have achieved reductions of as much as 72 million metric tons a year on average and much more than that if states chose to comply on their own," the authors of the analysis, John Larsen and Whitney Herndon, wrote in the Oct. 9 note.

The most likely path to compliance would have been for states to enter into some sort of trading agreement. Rhodium noted that states with an easy path to compliance would have had plenty of credits to trade-off to states in need. "This flexibility could lower the overall cost of the program but it also could limit emission reductions from the CPP as states that exceeded the goals traded away their gains to states that had to do more," the note said. If all states opted for trading, Rhodium said the Clean Power Plan would have done very little beyond its 32% goal in a future where gas remains cheap and renewable energy costs continue to decline. But with more expensive gas and renewables, the rule could have resulted in carbon reductions of 72 million tonnes a year.

If states had decided not to participate in trading, those that easily met the goals would have retained their credits, forcing states with tougher goals to make greater strides to reduce carbon, the analysts said.

"This would have led to more significant emission reductions of 91 to 206 million metric tons per year on average over the same time frame, and national power sector emission reductions that exceed the 32% headline objective set by EPA," the note explained.

For some states, the likely Clean Power Plan repeal is "a pretty big deal," Rhodium reasoned. In a future with low natural gas and renewable costs, those states include Texas, West Virginia, Georgia, Pennsylvania and Wisconsin. In a future with higher-priced natural gas and renewables, West Virginia, Wisconsin, Missouri, New Jersey, Iowa and Kansas will see the most relief from repeal of the Clean Power Plan.